If you cannot access the files through
the links, right-click on the underlined text, click "Save Link As," download to
your directory, and open the document in Adobe Acrobat Reader.

In response to the economic downturn, the
House Ways and Means Committee approved legislation on October 12 costing $103 billion in
fiscal year 2002  and $162 billion over ten years. The legislation consists
overwhelmingly of tax cuts. More than 95 percent of its cost both in 2002 and over the
next ten years consists of tax reductions. Moreover, as shown in the table below, between
eight and nine of every ten dollars in the package over the next decade consist of tax
cuts for corporations and businesses or tax cuts that disproportionately benefit
upper-income families.

While the legislation showers tax-cut benefits on
corporations and high-income individuals, it provides scant assistance to unemployed
workers. Only a small fraction of unemployed workers would receive added unemployment
insurance benefits when their regular benefits run out or secure any assistance in
maintaining their health insurance. A significant majority of unemployed workers would
receive no assistance under the legislation.

Percentage
Share of the Costs in 2002 and Over Ten Years
of the Provisions in the Ways and Means Package*

The legislation also is inconsistent with
bipartisan principles for a sound and fiscally responsible stimulus package that the
chairs and ranking members of the House and Senate Budget Committees issued just two weeks
ago. Those principles call for stimulus measures to be temporary in nature and to have a
quick effect on the economy. Many of the tax cuts in the Ways and Means package are
permanent rather than temporary, however, and would do little to stimulate the economy
now.

Essentially, the Ways and Means Committee has used the
stimulus legislation as a vehicle to attach a number of tax cuts that have little to do
with boosting the economy now or assisting unemployed workers but that have long been
sought by powerful interest groups and that some in Congress have long favored for
ideological reasons. Even Treasury Secretary Paul O'Neill criticized some of the elements
of the Ways and Means package as "show business" designed to accommodate
constituents.(2)

Some of these tax provisions provide major benefits to
selected corporations. Changes in the corporate Alternative Minimum Tax included in the
Ways and Means package would provide $25 billion in 2002 to corporations subject to the
AMT. According to an analysis by Citizens for Tax Justice, more than a dozen major
corporations  including IBM, General Motors, and several energy companies 
would each receive tax breaks of over $100 million as a result of these changes.
Companies would receive the vast majority of these AMT benefits as tax refund checks. The
total amount of such checks that would be written to these corporations would exceed the
total in "rebate" checks that would be sent to over 40 million low- and
moderate-income taxpayers under the bill.

Certain other key provisions in the Ways and Means
legislation heavily favor high-income taxpayers, the group that is most likely to have the
resources to weather an economic downturn and least likely to spend its additional
after-tax income. According to a separate analysis by Citizens for Tax Justice, the tax
cuts in the Ways and Means legislation are as skewed to people at the top of the income
spectrum as the tax cuts enacted in June (see box on page 9). In addition, several of the
tax measures in the Ways and Means package would make the nation's already worrisome
medium- and long-term budget outlook more problematic.

In fact, the threat the package poses to long-term fiscal
discipline is more serious than an initial glance at the legislation might indicate. The
official cost estimate that the Joint Tax Committee has issued for the legislation rests
on the assumption that the biggest immediate tax cut in the package  the partial
expensing of investments that corporations make  actually will expire at the end of
three years, as the legislation calls for, rather than being extended at that time. The
tax code is filled with corporate tax provisions that Congress initially established for a
few years but that were extended whenever the provisions were slated to expire. Because
the partial expensing provision is not limited to one year but continues for three years
and will be in effect for a considerable period of time after the economy recovers, its
link to the current slowdown as the rationale for its being temporary will be weaker by
the time it is scheduled to expire. That increases the likelihood it will be extended. If
that occurs  and there is little question that there will be powerful corporate
lobbying efforts to ensure partial expensing is extended when its scheduled expiration
approaches  the cost of this package will grow by about $250 billion over 10 years.
If partial expensing remains in effect, the total cost of the package thus will exceed
$400 billion over the decade.

The Ways and Means legislation raises the following issues:

While including generous tax breaks for corporations
and upper-income individuals, the Ways and Means legislation provides extremely limited
assistance to unemployed workers. The package speeds up the transfer of $9
billion already slated to be shifted from the federal unemployment insurance trust funds
to state unemployment accounts. It also provides states with $3 billion through the Social
Services Block Grant to provide health coverage for unemployed workers. These provisions
are unlikely to offer much assistance to the unemployed or to provide much stimulus to the
economy. The $9 billion in transferred unemployment insurance funds would simply go
into state unemployment trust fund reserves. States would not be required to use
these funds to pay unemployment benefits or to make any other expenditures in the months
ahead.

Indeed, many states would be likely to "bank" these
funds so they have a larger reserve in their unemployment accounts and thus more
protection against the possibility that the recession will prove deeper or more
long-lasting than is currently anticipated. Many states would deposit these funds in their
trust funds and wait to take further action until they know more about the extent of the
downturn. This is borne out by Congressional Budget Office estimates. CBO projects that
only $2.3 billion of this $9 billion would be spent in fiscal year 2002,(3) and only $3.6 billion would be spent overall, a pittance
compared to the amounts of additional unemployment benefits provided in previous
recessions. In the recession of the early 1990s, some $35 billion in additional weeks of
federal unemployment benefits were provided, as measured in 2002 dollars. (These $2.3
billion and $3.6 billion estimates include funds that would be spent on state
administrative costs in operating the unemployment insurance program, as well as funds
spent on benefits.)

The $3 billion the legislation provides for health insurance
is inadequate as well. More comprehensive proposals to help the unemployed maintain health
insurance by providing subsidies for COBRA premiums and additional Medicaid coverage for
low-income unemployed workers and their families have been estimated to cost between $16
billion and $25 billion, or five to eight times the amount the Ways and Means package
provides. Moreover, the Social Services Block Grant  the program through which the
$3 billion would be channeled  is a questionable vehicle for delivering these funds;
the program has little or no experience in offering health insurance coverage. The Ways
and Means Committee appears to have selected the Social Services Block Grant as the
program to receive these funds primarily because the program falls solely within the
Committee's jurisdiction, while more appropriate programs to help the unemployed maintain
health care coverage do not.

The Ways and Means package includes a number of
permanent tax cuts, thereby departing from bipartisan principles that all provisions of a
stimulus package be temporary. The legislation includes four permanent tax cuts:
a reduction in the capital gains tax rate, the repeal of the corporate Alternative Minimum
Tax, a conversion into permanent law of what is now a temporary provision that allows
deferral of taxation on certain income that businesses (primarily multinational
corporations involved in banking, finance, and insurance) earn overseas, and changes to
allow the cost of improvements to leased property to be depreciated over a shorter period.
These permanent tax cuts violate the principles the chairs and ranking minority members of
the House and Senate Budget Committees issued on October 4, which call for stimulus
measures to be temporary, to last no more than 12 months to the extent that is
practicable, and not to worsen the long-term budget outlook. Federal Reserve Chairman Alan
Greenspan and former Treasury Secretary Robert Rubin have warned that if a stimulus
package contains items that worsen the longer-term fiscal outlook, the package will risk
pushing up long-term interest rates and thereby undercutting some of the stimulative
effect the package otherwise might have.

The majority of the temporary provisions in the
package would be in effect for two or three years, distorting the definition of
"temporary" and increasing the likelihood that these provisions may be
permanently extended. The chairs and ranking members of the House and Senate
Budget Committees called for stimulus proposals to have a large part of their impact on
the economy in the next six months and to sunset within one year, to the extent
practicable. Only one major tax provision in the Ways and Means package meets this test
 the rebate for low-income workers. The spending provisions to aid the unemployed
also would be temporary and end relatively quickly.

In contrast, all of the corporate tax cuts that are temporary
would expire in either 24 months or 36 months and thus would extend beyond the period when
the economy is expected to be in need of stimulus. The largest individual income tax cut
 accelerating the implementation of the 25 percent tax rate  would entail
costs over five years, of which only one-quarter would occur in 2002.

Yet the consensus "blue chip" economic forecast
issued October 10, 2001, projects that the recession will end in early 2002, with real
economic growth reaching a robust 4.0 percent by the fourth quarter of 2002. Given that
the temporary corporate tax provisions would be in effect long after the economic slowdown
ended, the original rationale for their sunset is likely to have faded by the time these
provisions are scheduled to expire. By then, these corporate tax breaks may be viewed as
standard features of the tax code, making it more likely that Congress will continue them
just as it routinely extends other expiring corporate tax provisions each year. If these
new tax breaks become part of the regular package of "tax extenders," the future
costs will be very large. Joint Tax Committee estimates indicate that if the partial
expensing of business investment remains in effect for the next ten years rather than
expiring after three years, the cost of this one provision will be $265 billion over the
coming decade  or nearly 15 times the $18 billion cost of the three-year provision
in the Ways and Means Committee package.

The provision to accelerate certain tax-rate
reductions scheduled for 2004 and 2006 would reduce the ability of policymakers to ensure
fiscal discipline over the long run, a matter of particular concern given that most or all
of the total budget surplus over the next ten years has apparently disappeared. New
estimates issued by the chairs and ranking members of the House and Senate Budget
committees show that even without a stimulus package, virtually the entire non-Social
Security surplus over the next ten years has disappeared. Their estimates show that only
$53 billion of the non-Social Security surplus remains over the next 10 years.

Furthermore, as the Budget Committee chairs and ranking
members have noted, this $53 billion surplus estimate itself is unrealistically
optimistic, as it does not include the costs of a number of items that are likely to be
enacted, including extension of an array of expiring tax credits that are always extended
when they are scheduled to expire, the farm bill, prescription drug legislation, the costs
of responding to future natural disasters, and legislation to remedy serious problems in
the individual Alternative Minimum Tax that, if not addressed, will cause the number of
filers subject to the AMT to skyrocket from 1.4 million this year to 35 million by 2010.
The $53 billion non-Social Security surplus estimate also does not include the cost of
extending the provisions of the large tax cut enacted this spring; all of the provisions
of that tax cut expire between 2004 and 2010. Nor does it include the cost of any of the
additional tax-cut bills that the House of Representatives has passed since June (such as
those related to energy and charitable contributions) and that await action in the Senate.
Under a realistic accounting, most of the total  or unified  budget
surplus is gone.

Most
Tax Provisions in the Ways and Means Package Extend Beyond
One Year, When the Economy Is Expected to Have Recovered

Permanent
Tax Provisions

Repeal of corporate AMT

Reduction in capital gains tax
rate

Extension of provision
allowing deferral of taxation of certain income earned overseas

Provision allowing
improvements to leased property to be depreciated over shorter period

Tax
provisions that expire after four years

Acceleration of reduction of
individual income tax rate from 28 percent to 25 percent

Tax
provisions that expire after three years

Partial expensing of corporate
investment in certain capital assets

Five-year carryback of net
operating losses

Increase in exemption for
individual Alternative Minimum Tax

Tax
provisions that expire after two years

Increase in small business
expensing limit

Extension of 11 tax provisions
that expire at the end of 2001

Increase in deduction for
capital losses against ordinary income in 2001 and 2002

Provision expanding an
exception that allows unemployed workers to make penalty-free withdrawals from retirement
accounts to pay for health insurance*

Tax
provisions that expire after one year

Supplemental
"rebate" for low- and moderate-income taxpayers

Extension of Medical Savings
Account provision that expires at the end of 2002

* Eligibility
would be restricted to unemployed workers who receive unemployment compensation for four
consecutive weeks between September 11, 2001 and December 31, 2002.
Note: Table excludes technical amendments and spending provisions.

In light of this situation, policymakers will face tough
fiscal decisions when the recession ends and a need to exert fiscal discipline returns.
Policymakers may wish to consider at that time the deferral or cancellation of income-tax
rate reductions that have not yet taken effect and that primarily benefit more affluent
individuals. The Ways and Means provision that would accelerate rate reductions scheduled
for 2004 and 2006 would deny policymakers the option of deferring or cancelling those rate
cuts before they take effect. Indeed, that seems to be the provision's principal purpose;
it cannot plausibly be seen as an efficient or effective stimulus mechanism, since 75
percent of the tax cuts it confers would come after 2002 and the provision would benefit
only the top quarter of the population, a group that tends to save rather than spend the
bulk of additional income it receives.

Other tax measures in the package  such as the
repeal of the corporate AMT  also could lead to large out-year costs. The
corporate AMT was enacted to prevent excessive use of tax avoidance schemes by
corporations; its repeal would signal corporations that they can use existing tax breaks
more aggressively. Moreover, repeal would be likely to spur corporations to push more
vigorously for enactment of additional tax preferences that would further reduce future
corporate income tax revenues, since new preferences would become more valuable in the
absence of the AMT.

The capital gains tax cut, included against the advice
of Fed Chairman Greenspan and former Treasury Secretary Rubin, would be especially
ineffective as a stimulus mechanism and constitutes another permanent tax cut whose
benefits would overwhelmingly accrue to the wealthiest Americans. In
Congressional briefings following the September 11 attacks, Greenspan and Rubin laid out
principles that Congress should adhere to in developing an economic stimulus package.
Although Greenspan and Rubin generally avoided specific policy recommendations, they
singled out the capital gains tax rate as being inappropriate for economic stimulus
legislation. Similarly, in a recent report, the Congressional Research Service found that
"a capital gains tax cut appears the least likely of any permanent tax cut to
stimulate the economy."

The Congressional Research Service has also reported that
nearly 80 percent of the benefits of a capital gains tax cut would flow to the top two
percent of households. Research shows these high-income households tend to save more and
spend less of any new income they receive. To stimulate the economy, tax-cut benefits must
be spent.

The package includes corporate tax cuts that create
little incentive for firms to undertake new investments. As noted, the package
proposes a permanent repeal of the corporate Alternative Minimum Tax. This tax was
modified as part of the 1986 Tax Reform Act to prevent corporations from pyramiding so
many tax breaks on top of each other that some corporations could largely or entirely
escape income tax even while pulling down large profits. Although the corporate AMT may
have to be adjusted temporarily to avoid unwanted interactions with other temporary
provisions in the package, permanent repeal of the corporate AMT cannot be justified as an
effective stimulus mechanism. Indeed, corporate AMT repeal would be ineffective
as a stimulus, since it would not induce corporations to undertake new investment.
Eliminating the corporate AMT would simply reduce the taxes that corporations subject to
the AMT must pay on their current income, the majority of which represents income earned
on investments made in previous years. A recent Brookings Institution analysis
finds that approximately 90 percent of the tax benefits in 2002 of repealing the corporate
AMT would accrue to profits on old investments, rather than to profits earned on new
investments. The Brookings analysis concludes that repeal of the corporate AMT would be
highly inefficient as a stimulus.

Similarly, the provision of the bill that permanently extends
the deferral of certain income that corporations earn overseas has little to do with
increasing investment in the United States. Further, virtually the entire impact of
the provision would occur in years after 2002, when the economy is anticipated to have
recovered. Only one percent of its ten-year cost  $260 million out of a ten-year
total of $21.3 billion  would occur in 2002.

Provisions in the Ways and Means package also would
worsen the fiscal situation in the states, where budgets are already under severe strain
as a result of the economic slowdown. Some 44 states use federal depreciation
rules for their own corporate income taxes and would therefore be adversely affected by
the Ways and Means proposal to provide more generous depreciation deductions by allowing
partial expensing of business investment. States would likely lose approximately $5
billion a year in state revenues from 2002 through 2004 as a result of this provision.
This reduction in state revenues would come at a time when many states are falling into
fiscal crisis and, because of balanced budget requirements, are being forced to cut
programs and/or raise taxes amidst the downturn.

Taken as a whole, the Ways and Means legislation reflects a
sharp departure from the bipartisan principles for economic stimulus that have emerged
over the past few weeks in discussions among congressional leaders, the Administration,
and respected economic advisers such as Alan Greenspan and Robert Rubin. One principle
that has been stressed repeatedly is the importance of avoiding fiscal policies that will
worsen the medium- and long-term budget outlook, since such policies have the potential
both to exert further upward pressure on long-term interest rates and to worsen the
nation's fiscal problems down the road. High long-term interest rates can dampen economic
activity today, discouraging business and housing investment, and prevent the Federal
Reserve's rate-reduction policy from being as successful as it otherwise would be in
stimulating the economy.

Despite what appeared to be bipartisan acceptance of this
principle, nearly $60 billion  or almost 40 percent  of the $162 billion
ten-year cost of the package would occur after 2002, when the economy is likely to have
recovered. Furthermore, those figures understate the full extent of the fiscal problems
the Ways and Means proposal may cause. The "out-year" cost will be much greater
than $60 billion if some of the temporary corporate tax cuts are extended when they are
about to expire. As noted, a large push to extend these tax breaks is a virtual certainty
when they are about to end.

Ways and Means Tax
Provisions Skewed to High-Income Taxpayers

An analysis of the Ways and Means Committee package
by Citizens for Tax Justice finds that the corporate and individual tax cuts in the
legislation would flow disproportionately to the highest-income taxpayers. The top five
percent of taxpayers  those with incomes over $153,000  would receive more
than half of the tax cuts the legislation would provide in 2002 (including the rebates to
lower-income taxpayers that would be sent out at the end of 2001). The top one percent of
taxpayers  those with incomes over $384,000  would receive 35 percent of these
tax-cut benefits. (These estimates attribute the corporate tax cuts to individuals, based
on their ownership of capital assets, such as stocks and bonds. This is comparable to the
approach for examining the effects of corporate tax changes by income group used by the
Treasury Department and the Congressional Budget Office.

It should be noted that the figures just cited understate the extent
to which the tax cuts would go to those at the top of the income scale, because these
figures reflect only the tax cuts that would be provided in late 2001 and in 2002. After
this period, the rebate for low-income taxpayers would end, while all of the other major
tax provisions of the bill would remain in effect for at least another year or two, and in
some cases, would remain in effect permanently. To address this shortcoming in the
estimates cited above, the CTJ analysis also looks at the tax cuts in the Ways and Means
package other than the rebate. This provides a more accurate reflection of the
distribution of the measures effects in 2003, for example, when all of the major
provisions except the rebate would be in effect. Excluding the rebate, the wealthiest five
percent of taxpayers would receive 60 percent of the tax cuts. The wealthiest one percent
of taxpayers would garner 41 percent of the tax reductions.

These figures indicate that the tax cuts in the Ways and Means bill
are as skewed to those at the top of the income spectrum as the tax cuts in the large tax
bill enacted this spring.

The following sections of this analysis review
in more detail four of the most troubling aspects of the Ways and Means package: the
limited nature of its measures to assist the unemployed, its capital gains tax cut, its
acceleration of the reduction of the 28 percent tax rate, and its repeal of the corporate
AMT.

Benefits for Unemployed Workers

The Ways and Means package includes provisions to enhance
unemployment insurance and health benefits for unemployed workers. But these provisions
are small and of questionable design. They provide insufficient funding and use
ineffective means of disbursing the funds.

Unemployment Insurance

The Ways and Means package would accelerate the transfer of
approximately $9 billion of funds from the federal unemployment trust funds to state
unemployment accounts. These are funds that already are slated to be transferred to the
state accounts under current law. The Ways and Means provisions would speed up the
transfer.(4)

Despite the speed-up of this transfer, the proposal would
not provide immediate assistance to unemployed workers. These funds would simply be
deposited in state unemployment accounts and boost state unemployment insurance reserves.
For the funds to be taken from the reserves and used to augment unemployment benefits,
state legislatures would have to pass new laws to that effect. In most states, this could
not take place until at least early next year, and any actual benefit changes probably
would not be implemented until April 1 or later.

More important, only a modest portion of these funds would
likely be used to increase unemployment benefits. Early in a recession, many states would
be expected to hold these funds in their reserves and take a "wait and see"
attitude to determine how long the recession will last and how much of their reserves
ultimately will need to be drawn down. In other words, many states are likely to use the
funds primarily to strengthen the solvency of their unemployment insurance accounts so
they have greater certainty that they can operate their unemployment benefit insurance
programs without having to borrow from the federal government, increase unemployment
insurance taxes, or reduce unemployment insurance benefits if the recession endures. As a
result, CBO projects that only $2.3 billion of the transferred funds would be spent in
fiscal year 2002 on added unemployment benefits and program administrative costs combined
(and that only $3.6 billion would be spent over the next ten years).

With so little likely to be spent, the proposal offers
little in the way of benefits to the unemployed and would do little to pump money into the
economy quickly. This is in sharp contrast both to the federal response to the recession
of the early 1990s and to legislation (H.R. 3022) introduced in recent weeks by Rep. Ben
Cardin and a bipartisan group of Ways and Means members.(5)

In the last recession, $28.5 billion of federal funds 
or $35 billion when measured in 2002 dollars  were used to provide additional weeks
of unemployment benefits.

The Congressional Budget Office projects that under the
Cardin proposal, $26 billion would be expended on unemployment benefits over the next two
years. The proposal would provide an additional 13 weeks of benefits to unemployed workers
who exhaust their UI benefits after September 11. It also would raise the level of weekly
unemployment benefits, require that UI coverage be broadened to include workers laid off
from part-time jobs who otherwise meet all UI eligibility criteria (such as mothers with
young children who work 70 percent or 80 percent time), and require the use of recent
wages in determining eligibility for benefits so that low-wage workers with recent work
histories are not disqualified solely because older earnings data  rather than more
current data  are used. These provisions would be temporary, expiring at the end of
calendar year 2002.

The Ways and Means proposal is even more limited than the
bare-bones unemployment insurance proposal the Bush administration unveiled October 4.
Under the Bush proposal, no additional weeks of benefits would be provided until mid-March
to workers who have exhausted their regular unemployment benefits. Moreover, additional
weeks of benefits would be provided starting in mid-March only to workers who were laid
off after September 11 and who resided in one of the small number of states that would
meet the Administration's restrictive criteria to provide these benefits. The Labor
Department estimates that if the incipient recession is comparable in depth to the
recession of the early 1990s, about $5 billion in additional weeks of unemployment
benefits would be provided under the Administration's proposal.

Nevertheless, the Administration's rather spartan proposal
would guarantee additional weeks of benefits to some workers in hard-hit states. Under the
Ways and Means bill, unemployed workers who exhaust their 26 weeks of regular unemployment
benefits and cannot find a job likely would fail to receive any additional benefits in a
substantial majority of states, including a number of states with quite high unemployment
rates. In most cases, additional weeks of benefits would be provided only in states that
elected to provide these benefits and to finance them from state unemployment accounts,
something few states are likely to do.(6)

Compounding this problem, the $9 billion in funds that
would be transferred to state unemployment accounts would be allocated among the states not
on the basis of current need or unemployment levels but in accordance with where the
revenues in the federal unemployment trust fund were collected. As a result, the level of
funds allocated to many states would bear little relationship to the need for additional
unemployment benefits for laid-off workers in those states.

The Ways and Means approach is similar to a block grant in
which funds are allocated in a manner that does not match need and in which the funds can
be placed in reserve rather than used. Each state would simply receive a speed-up of funds
it would have received anyway.

In every previous recession of the last 30 years, federal
legislation has guaranteed that unemployed workers in every state who exhaust their
regular unemployment benefits are entitled to additional weeks of federally funded
benefits. The Ways and Means proposal breaks sharply with historical precedent in this
area.

Health Insurance Coverage

The Ways and Means package includes two provisions to
assist unemployed workers with health insurance coverage. The first proposal is a $3
billion grant to states through the Social Services Block Grant. This amount is less than
one-fifth of the $16 billion to $25 billion that more comprehensive plans would cost.
Those alternatives  such as a plan developed by Senators Max Baucus and Edward
Kennedy, the chairmen of the Senate Finance and Senate Labor and Human Resources
Committees  would subsidize 50 percent to 75 percent of COBRA premium costs through
June 30, 2003 for laid-off workers who qualify for COBRA and also would establish a
temporary state Medicaid option to cover low-income unemployed workers who cannot afford
the remaining COBRA premium, are ineligible for COBRA because they worked for a small
business, or worked for firms that did not offer health insurance. (The Baucus-Kennedy
proposal, which would subsidize 50 percent of COBRA premiums, would cost $16 billion.
Otherwise similar proposals that would subsidize 75 percent of COBRA premiums would cost
$25 billion.) Because of the limited funds that the Ways and Means legislation would
provide, this provision of the Ways and Means bill would maintain health insurance
coverage for only a very small fraction of unemployed workers.

In addition, the Social Services Block Grant is a
questionable mechanism for providing health care coverage for unemployed workers and their
families. State SSBG programs have no experience in identifying families' health insurance
needs or offering health insurance.

The second proposal would allow more unemployed workers to
withdraw funds without penalty from individual retirement accounts (IRAs) and
employer-based pension arrangements (such as 401(k) and 403(b) plans) to pay for health
insurance premiums. Under current law, individuals eligible for unemployment insurance
benefits for 12 consecutive weeks can make penalty-free withdrawals from IRAs equal to the
cost of their health insurance premiums. The Ways and Means legislation would permit
people who collect unemployment for four consecutive weeks between September 11, 2001 and
December 31, 2002 to make such early withdrawals from both IRAs and other pension
arrangements.

This proposal would do little to help low- and
moderate-income unemployed individuals who are at risk of losing their health insurance,
since most low- and moderate-income workers lack significant IRA or pension savings. While
89 percent of families with incomes above $100,000 had retirement accounts in 1998, only
six percent of families with annual incomes below $10,000 and 25 percent of families with
incomes between $10,000 and $25,000 participated in IRAs or employer-based pension plans.
Even when low- and moderate-income workers do contribute to IRAs or have an employer-based
pension plan from which withdrawals could be made, the amounts they have in these accounts
are typically so modest  the median value of retirement accounts in 1998 was $8,000
for families with incomes between $10,000 and $25,000  that COBRA premiums would
quickly deplete the accounts. The annual cost of family health insurance premiums is now
about $7,000 a year.

Capital Gains Tax Cut

The Ways and Means legislation would reduce the top capital
gains tax rate from 20 percent to 18 percent and cut the lower 10 percent capital gains
rate to 8 percent. This capital gains tax cut would do little to spur the economy over the
next few quarters. In testimony before the Senate Finance Committee on September 25, both
Alan Greenspan and Robert Rubin advised Congress against reducing the capital gains tax
rate as a way to stimulate the economy in the short run.(7) A Congressional Research Service report issued September
17 reached a similar conclusion, finding that "a capital gains tax cut appears the
least likely of any permanent tax cut to stimulate the economy in the short run."(8) Even proponents of capital gains
tax cuts typically acknowledge that such tax cuts are aimed at the long run and have
little to do with boosting the economy in the short term. The Washington Post
reported House Ways and Means Committee Chairman Bill Thomas admitting last month that
"he doesn't consider it a short-term recovery tool."(9)

A reduction in the capital gains tax rate not only offers
little in the way of short-term stimulus but also provides few benefits to the economy in
the long term. Credible analysis has not substantiated claims that a capital gains rate
cut would raise investment and risk-taking in the long run and thereby boost economic
growth. A study undertaken by the Congressional Budget Office in 1998, in which CBO
examined a permanent reduction in the capital gains tax proposed by then-Speaker Newt
Gingrich, concluded the proposal would increase private saving and the size of the economy
by only minuscule amounts.(10)
While some studies that have been touted by proponents of a capital gains tax cut are said
to show large, positive effects, CBO found the studies achieved these results by relying
on faulty and inappropriate assumptions.

Specifically, CBO found that reducing the top tax rate on
long-term capital gains from 20 percent to 15 percent  a larger reduction than the
Ways and Means package would make  would cause an increase in private saving of only
0.3 percent and add about 0.06 percent to the capital stock after ten years. CBO projected
that the increase in the size of the U.S. economy after ten years would amount to about $2
billion or $3 billion  or less than two one-hundredths of one percent of GDP,
an amount that is little more than rounding error in the measurement of GDP in a $10
trillion economy. The effects of the smaller capital gains proposal in the Ways and Means
package would be even more minuscule.

A capital gains tax cut also would be highly regressive and
provide additional tax subsidies to the same high-income individuals who received a highly
disproportionate share of the tax cut enacted in June and whose share of national income,
according to the latest available data, is larger than it has been since before World War
II.(11) High-income
taxpayers who have the largest portfolios of assets  and who consequently pay the
bulk of the capital gains taxes  would reap windfall benefits from the proposed
capital gains tax cut. Congressional Research Service estimates show that the two percent
of the population with the highest incomes  those with incomes exceeding $200,000
 pay 80 percent of capital gains taxes.(12) They thus would likely receive 80 percent of the tax cut
the Ways and Means provision would provide. (Similarly, the highest-income eight percent
of taxpayers pay more than 90 percent of capital gains taxes and would be expected to
secure more than 90 percent of the capital gains tax cut.) These high-income taxpayers are
the group least likely to use tax-cut benefits in a way that would generate economic
stimulus, by increasing consumer purchases.

Accelerating Tax Rate Reductions

The tax-cut package enacted in June lowered the 28 percent
individual income tax rate to 27 percent on July 1, 2001, with further one-percentage
point reductions scheduled for 2004 and 2006. Accelerating these scheduled rate
reductions, by implementing the 25 percent rate in 2002 instead of in 2006  as the
Ways and Means bill would do  would be a poorly targeted and ineffective means of
stimulating the economy.

More than three-quarters of the cost of this proposal would
be incurred after the economy has recovered. According to Joint Committee on
Taxation estimates, the proposal would cost $53.7 billion, making it the most expensive
proposal over ten years in the package. Only $12.8 billion of the cost  or less than
24 percent  would result in 2002. The remainder would occur in 2003 through 2006,
years in which the economy should already have recovered from the current slowdown.

Accelerating the implementation of the 25 percent rate
would exclusively benefit the top one-quarter of all tax filers  not middle-income
taxpayers, as supporters of this proposal frequently claim. Internal Revenue Service data
and Congressional Budget Office analyses show that more than three-quarters of all tax
filers either have no taxable income (because their income is less than their deductions
and exemptions) or face a marginal tax rate of no more than 15 percent.(13) Fewer than one-quarter have
incomes sufficiently high to be in the 28 percent bracket or a higher bracket.

These more affluent taxpayers are likely to save more
 and spend less  of a tax cut than taxpayers with lower incomes. Yet for the
economy to receive the desired boost in the short run, tax-cut beneficiaries must spend
their extra dollars. Saving these dollars has no short-term stimulative effect and will
not speed economic recovery.

Moreover, the taxpayers who would benefit the most from
this proposal are those in brackets higherthan the 28 percent bracket,
because it is only these individuals who would be able to apply the lower tax rate against
the full amount of income that the 28 percent bracket covers.(14) A married taxpayer with taxable income of
$50,000 (and gross income of close to $65,000) has $3,300 of income that falls in the 28
percent bracket. This taxpayer would receive a tax cut of $66 next year as a result of
dropping the rate from the 27 percent rate that otherwise would be in effect in 2002 to 25
percent. By contrast, a taxpayer with taxable income of more than $112,850  the top
of the bracket  would receive a tax cut of more than $1,300 next year, since the two
percentage-point rate reduction would be applied to more than $66,000 in income (i.e., to
the full amount of income that falls in the 28 percent bracket).

Those who would receive the largest tax cuts from this
proposal  those in tax brackets higher than the 28 percent bracket  constitute
the top five percent of tax filers. These individuals  who also would benefit the
most from the bill's capital gains tax cut and receive windfall tax reductions from other
provisions of last spring's tax cut legislation as well  have a low "propensity
to consume."

It makes intuitive sense that families with lower incomes,
and thus a wider range of unmet needs, are more likely to spend an extra dollar of
after-tax income than a high-income family and that high-income families are more likely
to save a greater portion of an extra dollar. Research confirms these common-sense
assumptions. For example, a National Bureau of Economic Research paper published last year
found that the propensity to save rises with income.(15) It concluded that "the rich do save more, whether
the rich are defined to be the top 20 percent of the income distribution...or the top 1
percent." Given these facts, including the acceleration of tax-rate reductions in a
stimulus package makes little sense.

Accelerating these rate reductions also represents unsound
policy at a time when a premium should be placed on fiscal prudence. Locking in these rate
cuts would weaken the nation's ability to address future fiscal pressures. The economic
and budget outlook has changed dramatically in the last few months; policymakers will have
to consider significant adjustments to budget policies when the recession ends, especially
in light of increased defense and security expenditures. One advantage of having the
enacted rate reductions phase in over time is that if the need for resources to meet other
contingencies grows, policymakers will have the option of postponing or cancelling future
rate cuts. Doing so would generate additional revenues without increasing current tax
rates. If the scheduled rate reductions are implemented sooner, however, these lower rates
will be locked in, and undoing the rate reductions if the nation's fiscal difficulties
intensify will entail enacting tax increases.

The Committee for Economic Development, an organization of
leading corporate executives and university presidents, issued a report in early October
warning of the long-term fiscal difficulties the nation faces. The report points to the
gradual phase-in of provisions of the tax cut enacted this spring as providing a possible
budgetary safety valve, since tax cuts could be deferred or removed before taking effect.
The Ways and Means legislation would weaken this safety valve. At a time when future
expenditure needs are highly uncertain, fiscal prudence militates against accelerating
future tax rate cuts.

Repeal of the Corporate AMT

The corporate Alternative Minimum Tax was implemented in
response to actions by a number of large, highly profitable corporations to use tax breaks
so aggressively that they largely or entirely escaped paying income tax. The AMT is
designed to ensure that such corporations cannot avoid paying income tax in this manner.
Its elimination would likely lead to a situation in which profitable corporations again
escape the income tax.

Moreover, the Ways and Means proposal would not simply
eliminate the corporate AMT. It also would make existing corporate AMT credits
"refundable." These credits essentially represent the amount of Alternative
Minimum Tax that corporations have paid in previous years. A corporation can use these
credits only to offset regular corporate income tax in years that the income tax it owes
exceeds the amount it would owe under the corporate AMT. Corporations that routinely pay
the AMT (or that do not owe much in corporate income tax) thus are not able to make full
use of these credits. By making these accumulated credits refundable, the Ways and Means
legislation would create windfalls for these corporations. The Treasury would be required
to write large checks worth millions of dollars to many of these companies.

According to an analysis by Citizens for Tax Justice, 13
major corporations would receive tax breaks of more than $100 million each as a result of
these changes to the corporate AMT.(16)
Energy companies  such as ChevronTexaco and Enron  make up nearly half of
these 13 companies. The biggest winner would be IBM, which alone would receive $1.4
billion, and General Motors and General Electric, which would receive $833 million and
$671 million, respectively.

Some temporary adjustments to the corporate AMT may indeed
be needed to ensure that the AMT does not unintentionally weaken the impact of other
temporary provisions in the package. But neither total repeal of the corporate AMT nor
making the AMT credits refundable is necessary for these purposes.

Furthermore, these permanent changes are unlikely to
stimulate new investment by these corporations, because the tax-cut benefits would not be
conditional upon the corporations' making new investments. In a recent analysis, Brookings
Institution senior fellows William Gale and Peter Orszag estimate that in 2002,
approximately 90 percent of the tax reductions from eliminating the corporate AMT would
consist of tax cuts on profits from old investment  that is, investments
made in years before 2002  rather than new investment.(17) The Brookings analysis concludes that
repealing the corporate AMT consequently would do little to provide short-term stimulus.
Gale and Orszag observe that "elimination of the corporate alternative minimum tax is
an extremely blunt and inefficient approach to encouraging new investment in the short
run."

In addition, repealing the corporate AMT may signal to
corporations that aggressive use of tax breaks to avoid paying income taxes is now
acceptable, and corporate lobbyists are likely to see this as an opportunity to seek
enactment of more tax preferences in the years ahead. Many potential corporate tax breaks
would be more lucrative and attractive in the absence of the corporate AMT, which limits
the use that corporations can make of such tax breaks.

These concerns are based on historical evidence. Prior to
modification of the corporate AMT as part of the 1986 tax reforms, a number of major
corporations routinely avoided paying taxes. A survey conducted by Citizens for Tax
Justice found that 130 of the nation's 250 largest corporations  or more than half
of them  paid no federal income taxes in at least one year between 1981 and 1985.(18) It was to address this problem
that the corporate AMT was enacted in the first place. Repealing it could be an invitation
for such practices to return.

End Notes:

1. The discussion of unemployment
insurance in the analysis is based on work by Wendell Primus of the Center on Budget and
Policy Priorities. The discussion of extending health insurance coverage to the unemployed
is based on work by Edwin Park and Leighton Ku of the Center.

2. John D. McKinnon and Damian
Milverton, "White House Signals It Intends to Block Huge Tax-Cut Bill Voted by House
Panel," The Wall Street Journal, October 16, 2001.

3. In estimating the cost of this
provision, CBO has provided a range for its estimates of the amount of these funds that
would be spent in fiscal year 2002. The $2.3 billion figure represents the high end of the
range. The low end of the range is $700 million, but that estimate is unrealistically low
because it is based on CBO's April economic forecast. That forecast assumed an average
unemployment rate in FY 2002 of only 4.5 percent and is clearly obsolete. The more recent
August CBO forecast assumed that the FY 2002 unemployment rate would average 5.1 percent.
That forecast, as well, which was issued before the terrorist attacks and assumed no
recession would occur, is more optimistic than most private forecasts. CBO's $2.3 billion
estimate is based on unemployment rate assumptions that are more pessimistic than its
August projection and more in line with the current consensus of private forecasters.

4. Under the
current CBO baseline, $40 billion will be transferred over the next ten years from federal
UI trust funds to state unemployment accounts under a provision of UI law known as the
Reed Act. About $4 billion would be transferred at the end of fiscal year 2002, and about
$3 billion to $5 billion each year thereafter. The Ways and Means proposal advances some
$9.3 billion of these funds to states earlier than the states otherwise would receive
these funds.

5. The Ways and Means Committee
members co-sponsoring the legislation include Democratic Representatives Rangel,
McDermott, Stark, Coyne, and Levin and Republican Representatives English and Houghton.

6. Additional weeks of benefits also could be
provided in states that qualify to pay "extended unemployment benefits," but
few, if any, states are likely to qualify because the level of unemployment needed for a
state to qualify to pay extended benefits is very high. In many states, the unemployment
rate would have to rise to close to nine percent before extended unemployment benefits
could be provided.

7. Richard Stevenson, "Congress Gets Plea to
Drop Tax Benefits for Investors and Widen Economic Relief," The New York Times,
September 26, 2001.

13. David Campbell and Michael Parisi,
"Individual Income Tax Rates and Tax Shares, 1998," IRS Statistics of Income,
Spring 2001, Tables 1 and 5. Committee on Ways and Means Committee, U.S. House of
Representatives, "2000 Green Book: Background Material and Data on program: Withing
the Jurisdiction of the Committee on Ways and Means," October 6, 2000, Table 13-21.

14. In 2002, the 28 percent bracket for married
taxpayers begins with taxable income of $46,700 (which corresponds to a minimum of $60,550
in adjusted gross income if the taxpayer has no children and higher levels if the taxpayer
has children) and ends with taxable income of $112,850.